NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on Tippecanoe County Governmental Building Corporation, Indiana's first mortgage bonds as follows:
--$5.3 million first mortgage refunding bonds series 2011, at 'AA+'.
Fitch has also affirmed the county's Issuer Default Rating (IDR) at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are backed by lease payments payable from a dedicated ad valorem tax levied by Tippecanoe County. Lease payments are not subject to annual appropriation. If the leased property is damaged or destroyed, the county shall abate the lease payments for the period of time the leased property is unfit for use or occupancy. To mitigate the abatement risk, the county is required to carry physical loss insurance equal to 100% of the replacement cost of the property, and rental interruption insurance equal to two years. The leased premises consist of a jail facility.
KEY RATING DRIVERS
The 'AA+' IDR is based on Tippecanoe's ample expenditure flexibility, very low long-term liability burden, and robust reserves available for operational use, which offset the county's limited legal ability to raise revenues and limited revenue growth prospects. Strong management has supported financial flexibility during times of economic recovery and has positioned the county well to maintain strong gap closing abilities through economic downturns. Fitch believes that the insurance provisions of the first mortgage refunding bonds sufficiently mitigate abatement risk to maintain the same rating on the lease revenue bonds and the IDR.
Economic Resource Base
Tippecanoe County is located in west central Indiana 60 miles northwest of Indianapolis. Over the past decade growth has been above state and national trends, with county population increasing 7.5% since 2010 to 185,826 in 2015. Taxable assessed values (TAV) have performed positively in recent years (2012-2016), with the compound annual growth rate totaling 14%.
Revenue Framework: 'bbb' factor assessment
Fitch expects revenue performance to be generally in line with the rate of inflation, due to state tax caps that hinder the ability of the county to capture economic growth through its revenue system and limit the legal ability of the county to raise additional revenues.
Expenditure Framework: 'aaa' factor assessment
The county's rate of expenditure growth is expected to be in-line with revenue growth. Expenditure flexibility is ample due to very low carrying costs for debt service, pension, and other post-employment obligations and solid workforce control.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden including pension liabilities and overall debt is low relative to personal income.
Operating Performance: 'aaa' factor assessment
Financial resilience through downturns is very strong due to ample expenditure flexibility and robust rainy day fund reserves. Management makes consistent efforts to support financial flexibility.
RATING SENSITIVITIES
Improved Revenue Prospects: The rating is sensitive to the county's limited legal ability to raise revenues and limited revenue growth prospects. Improvement in Fitch's expectations for revenue growth prospects and/or the county's state-mandated taxing authority could result in a rating upgrade.
CREDIT PROFILE
The county benefits from its proximity to the greater Indianapolis employment region as well as a strong local base anchored in higher education and manufacturing. Purdue University and a solid manufacturing sector, which includes General Electric and Subaru, serve as major economic engines for the community.
Wealth indicators are below average with median household income and per capita personal income below state and national levels. However, wealth metrics are likely negatively skewed due to the large student population. Unemployment rates are generally comparable to state and national averages.
Revenue Framework
The majority of the county's revenues are derived from property taxes, which comprise 44% of total operating revenues. The second largest revenue raising category is income taxes which is equal to approximately 31% of operating revenues.
The county's natural pace of revenue growth, absent of government policy action, is expected to be slow with year over year gains not exceeding the rate of inflation. General fund revenues calculated on a compound annual growth rate (CAGR) over the ten years through 2014 performed negatively at -0.4%, largely due to the implementation of a circuit breaker property tax cap in 2009, which caused a decrease in property tax revenue in FY 2009 and FY 2010. The state also required the county to remove county option income tax (COIT) revenues from the general fund in 2013, which further reduced general fund revenues. As of 2017, COIT funds will once again be reported combined with the general fund. The 10-year CAGR for operating funds (combining the general, COIT, and county economic development income tax (CEDIT) funds) is a stronger at 2.1%; Fitch believes that this is the more meaningful statistic to inform expectations for future growth.
While the circuit breaker tax cap limits property tax growth, income tax revenue growth is uncapped. Overall, Fitch believes that county will benefit from modest property and income tax gains, with results generally approximating the level of inflation.
The county's legal ability to independently raise revenues is limited. The circuit breaker tax cap guarantees that property tax rates in overlapping districts are limited to a percentage of gross assessed value depending on the property classification. Property taxes are limited to 1% of assessed value of homestead property, 2% for other residential property, and 3% for commercial and industrial properties. While the county has the ability to increase its local income tax rates from the current rate, this would require the support of multiple governmental bodies within the county's jurisdiction, and is therefore not in the county's independent legal control.
The county has the ability to raise charges for fees and services by 3% without requiring voter approval, but the revenue impact of this would be negligible.
Expenditure Framework
The largest portion of the city's operating expenditures is used for personnel-related costs for public safety. The remaining expenditures account for operations of the courts, jails, sheriff, zoning and parks and recreation.
Fitch expects the county's natural pace of spending growth to be in line with to marginally above expected revenue growth, given expectations for the county's revenue stream and the nature of its spending obligations. The county's expenditures are largely driven by labor force salary increases and employee benefits costs, which account for approximately 75% of operating expenditures. The average increase in employee salaries and benefits has approximated the pace of inflation.
Carrying costs for pension required contributions, other post-employment benefits (OPEB), and debt service as a percent of government spending equal a low 3% of governmental expenditures, primarily related to full actuarial funding of OPEB.
The county has ample expenditure cutting flexibility. Fitch believes that management is well-positioned to manage its expenses and have demonstrated a willingness and ability to find cost savings. For example, the county has identified discretionary cost savings equal to approximately 15% of general fund expenditures. While management does not intend to implement cuts at this time, Fitch believes that the county is committed to utilizing these tools if faced with future financial pressures.
Long-Term Liability Burden
Tippecanoe's long-term liability burden is low with the net overall debt and unfunded pension liability burden totaling 4.2% of per capita personal income. Overlapping debt comprises 88% of the liability, with direct debt accounting for a low 3.5%. Approximately 100% of direct debt is scheduled for retirement within 10 years. Fitch expects the long-term liability burden to remain low.
The county participates in three defined benefit pension plans: the Indiana Public Employees Retirement Fund (PERF), a cost sharing multiple-employer plan; and two single employer pension plans : the County Police Retirement Plan and the County Police Benefit Plan. Management routinely funds the full actuarially required contribution (ARC) of PERF and has over funded the County Police plans in recent years. The combined plans reported an assets-to-liabilities ratio of 79.6%, assuming a 7% rate of return, as of Dec. 31, 2014.
Operating Performance
The county has exceptionally strong gap-closing ability that leaves it well positioned to confront times of economic downturn. For example, during the great recession the county was able to rebound due to a combination of stringent expenditure controls and the strategic use of unrestricted reserves. The strict budget management resulted in very modest draw on the county's ample reserves in 2009. Fitch believes that management would continue to follow these practices when faced with another moderate economic downturn.
Fitch considers budget management at times of economic recovery to be strong as well. Unrestricted reserves in the general, COIT, and CEDIT funds equaled 62% of operating fund spending at the end of fiscal 2014. The county routinely transfers excess from these funds to the Rainy Day Fund, which is earmarked for additional operational support; when combined with other funds, the unrestricted fund balance rises to 80% of operating fund expenditures on a cash basis. Although the use of cash-basis accounting overstates the level of balance when compared to the more common GAAP-basis reports that Fitch uses in rating local governments, Fitch believes that the level of balance is ample even when factoring in this consideration.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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